Wednesday, December 25, 2013

Needs vs. Want (需要与想要)

Needs vs. Want Part 1:
High debt and low public efficiency

华商与经济转型系列104: 需要与想要（上）债务膨胀 政府效率偏低

夏伟文 & 陈薛卉 (16 Dec 2013)

“When we gained our
independence, we ranked among the poorest countries in the world. Now, we are
classified as a high human development index nation. Our nominal income per
capita is RM20,900 – a 26 fold increase from the time of Merdeka”
said former Prime Minister Abdullah Badawi in December 2007.

Despite
the continuous achievement since then, rapid development of Singapore always
cast a shadow upon Malaysia. Question remains on why Malaysia still so much
behind even though we are endowed with much more resources than Singapore.
Perhaps, the answer is Malaysia’s economic transformations were (in the past) and
are still currently more focused on “want” rather than “needs”.

It
is believed that Warrant Buffet, the world most successful investor has once
said: “Buying too many things we want will one day end up having to sell things
we needs.” In this context of needs versus want, economic transformation that
focuses on want and not needs is like trying to grow branches and leaves
without strengthening the roots. The tree (economy) will not be healthy.

In
our eagerness to “transform” our economy, fundamental needs should to be addressed
first. We should be transforming to fulfill our “needs” first. “Needs” is
something necessary for human to life a healthy life. In economic sense,
“needs” is necessary elements or conditions for sustainable development. “Want”
is some sort of emotional desire. Thus, it can be related to “economic ego”,
which function may be merely for self-boosting.

Historical Lessons

In
the past, we switch from mining to rubber and palm oil plantation. That change
was a need because tin mining was fast exhausting at that time. After that, we
shift to light industry, mostly for import-substituting purposes. As both our
populations as well as the world industrialization were growing rapidly, this
change was needed to provide sufficient employment and boost value added to the
economy. However, when we ventured into heavy industrialization, we made some
wrong decision in needs versus want situation. Heavy industrialization is a
need but some selected projects, especially national car project were merely
“want”. That project was based on estimates of annual car sales rising 8% from
110,000 in 1982. Instead, total sales dropped to only about 30,000 in 1987. In
other projects, cement production capacity doubled the domestic consumption in
the mid-1980s. Perwajar Steel’s RM1.2 billion investment on prototype found not
viable but only could get back RM46 million compensations.

Mahathir
Mohamad has been aggressively propelling Malaysian economic growth in his
premiership era. The country does need that aggressive growth initially but we
do need to slow down for some “economic maintenance” too. Thus, several mega
projects like Sepang F1 circuit and KL Tower maybe just “want”. One may also wonder whether our costly
astronaut program is a “want” or “needs”. How about building the Menara
Warisan? Perhaps, the most amazing “want” may potentially go to building a
bridge to Sumatera!

Taking
economy as human, “needs”, in a less stringent concept, can be redefined as
something necessary for the economy to be at least sustainable or preferably,
to improve. In Malaysian economy context, five major needs urgently require our
attention and action. They are the needs to (i) reduce debt, (ii) further
improve public sector efficiency (iii) stop brain drain, (iv) stop corruption
and (v) create a super industry.

Reduce debt

A
healthy economy should be best sustained by continuous increase in labor productivity
and improve in technology. Next best is through inflow of foreign direct
investment. Worst but very common method is through debt. Latest Economic
Report expected federal government’s debt to increase to RM541.3 billion or
54.8% of Gross Domestic Product (GDP) for year 2013. This is alarming as the
percentage is almost touching legalized debt ceiling of 55% of GDP. Reaching
the limit may cause government shutdown like the United States. Thus, debt
problem in both public sector as well as private sector urgently need our attention
and effort.

Nonetheless,
level of debt cannot be judged per se. Both quantitative comparison and
qualitative aspect needed. Based on Figure 1, Malaysian central government’s
debt has been raising gradually above the 50% of GDP. For year 2011, it is at
comparable level to some developed and developing countries like India (48.5%),
Spain (55.2%), Brazil (52.8%) and Germany (55.6%). Malaysian central
government’s debt is even lower than the United States (81.8%), Portugal
(92.5%), United Kingdom (101.2%), Greece (106.5%), Singapore (110.2%) and Italy
(110.9%). In addition, Malaysia’s sovereign credit by Standard & Poor is
higher than many Asian and European nations (see Table 1).

The
quality of the debt is important. For example, Singapore’s debt is more than
its GDP but still get the best AAA rating. Its government through their
official website claimed that Singapore’s debt is not used to fund its (usually
balanced or surplus) Budget. Their borrowing is all invested with return that
is more than debt service amount.

This
has prompt Singapore government proudly clarifies that they do not borrowed to
spend. In contrast, Malaysian government borrowed to spend! We did not have investment
assets backing every Ringgit borrowed (like Singapore). Hence, can Malaysia
sovereign rating hold? Flitch Rating has already issued a possible downgrade
warning. Servicing debt and its interest will also burden current generation
and deplete resources for future development.

Figure
1: Central Government Debt

(Source: World Bank database.
Data is not available or incomplete for various other ASEAN countries such as
Philippines, Brunei, Vietnam, Cambodia and Myanmar)

Table
1: Standard & Poor’s Sovereign Rating (Local Currency)

Country

Rating

Country

Rating

Malaysia

A

Italy

BBB

Indonesia

BB+

Spain

BBB-

Thailand

A-

Germany

AAA

Singapore

AAA

Portugal

BB

India

BBB-

United Kingdom

AAA

China

AA-

Greece

B-

Philippines

BBB-

Brazil

A-

Vietnam

BB-

United States

AA+

(As viewed on 2nd November
2013)

Further Improve Public Sector

Malaysia
public sector has seen amazing improvement in Abdullah Badawi’s premiership
era. In current Najib’s era, this aspect is an important element in Economic
Transformation Plan (ETP) too. However, there is still huge room for further
improvement. To improve, we need to both reduce public sector and increase its
productivity.

In
addition, this need is closely linked to the public sector’s debt problem in
Malaysia. Large public sector causes high operating expenditure. Table 2 shows
some analysis of Malaysia’s operating expenditure as well as brief comparison
with Singapore.

Table 2: Malaysia’s Operating Expenditure
Analysis

Malaysia (ratios)

2010

2011

2012

Total operating
expenditure to GDP (%)

21.02

22.38

23.87

Federal government
operating expenditure to total operating expenditure

Malaysia’s
total operating expenditure to Gross Domestic Product (GDP) is twice larger
than Singapore. In addition, the Malaysia’s figure has been rising in the three
years as shown in the table. Federal government expenditure takes up majority
share of total operating expenditure, rising from 79% in 2010 to almost 81% in
2012.

Does
those statistic implied that Malaysian public sector has becomes too big to
fail? Government may face serious negative consequences from public servants if
they try to downsize to force improvement of efficiency. The consequences may
vary from protest to loss of votes in general election. Inefficiency in public
sector, imprudent public finance and corruption has magnified the negative effect
of a large public sector to economic growth and sustainability.

Conclusion

Human
greed and ego cause us to want a lot of things but scarcity limit our ability
to get everything we want. Therefore, choices need to be made. Then, it is up
to us to suppress our greed and ego to choose needs over want. Malaysia’s
transformation should now give priority to achieve economics needs to ensure we
become a holistic and sustainable developed nation beyond 2020.

Needs vs. Want Part 2: Corruption virus can defeat economy

华商与经济转型系列105：需要与想要（下）腐败病毒击垮经济

夏伟文 & 陈薛卉 (23 Dec 2013)

If
we take economic analysis as human anatomy, public sector is like our blood
vassals. It must not be too large or too small but must be efficient to enable
blood (economic activities) to circulate to all over our body (whole economy/country).
Debt is like drug. We may need it to ease some pain (example, economic downturn)
or as booster (fiscal stimulus). Over-consumption of drug (debt) will lead to
serious negative side effect in the future. Talent or “brain” is akin to
vitamin needed to keep the whole body (economic) system growing healthily.
Thus, what will happen to our growth if these vitamins (brains) are regularly drained
off from our body? Corruption is like virus. This virus may not kill us
immediately but sooner or later, the body (economy) will collapse by it. Thus,
it needs to be eliminated, or at least to be contained. We also need our
internal organs (industries) to be as strong as possible.

Thus,
we need to trim our over-size and inefficient public sector, reduce or
eliminate debt and corruption, stop brain drain as well as create at least a
super strong industry.

Stop Brain Drain

The
government always aims to have brain gain as in Singapore and United States.
That is good. However, it will be much practical to first focus on the need to
stop brain drain, which has been a norm since decades ago. Nobel Prize winner,
Paul Krugman has famously and correctly predicted the fall of Asian Miracle
through the stagnant or decline of total factor productivity (TFP) in many
South East Asian countries. Brain drain is the cause of this decline.

Besides
monetary factors, our previous article (on 28th January 2013) highlighted
five other major factors: (i) perception of
“Moon overseas is brighter and better”, (ii) perception of “social injustice”, (iii) fear of
unemployment or underemployment, (iv) “3C” factor (cost of living, crime and
corruption), and (v) talent does not fulfill Malaysia’s industrial needs. Currently,
Economic Transformation Program (ETP) and TalentCorp have plans to solve this
problem. However, looking at those factors, solving it will not be easy. Yet,
we need brain drain to stop now if we are to push towards to become developed
nation by 2020.

These
few options can be considered. Firstly, Malaysia needs to reduce the wage gap,
especially between us and Singapore. It can be done by shifting from low
value-added to high value-added industries as well as having a strong Ringgit
policy. Secondly, the country needs to create a sense of proud to work in
Malaysia. Having our own “super industries” whose brands are recognized
globally will help. Thirdly, perhaps the hardest, is to create social justice
and economic fairness to all as this is one of the major factors that cause brain
drain. Besides all those, we also need to restructure our education system to
produce more and better Malaysian talents.

Stop corruption

There is a popular quote saying “corruption is
like a snowball, once it is set rolling, it will increase.” After become huge,
this snowball will then destroy everything in its path. Corruption is a major
factor that caused the fall of empire while issues of corruption encompass mismanagement of public funds.

Stopping
corruption has always been a dominant issue in Malaysia. During Abdullah Badawi
era as Prime Minister, he has been portrayed as the Chinese legendary graft-buster Justice Pao.
Unfortunately, his no-nonsense
effort
to anti-corruption has been
knocked out by shocking Auditor
General’s Report 2006. Since then, yearly Auditor General’s Report
has continuously catching public attention on the perpetuity of mismanagement of public funds.
Anti-corruption agency was revamped but varieties of corruption-related cases
remain unsolved. Among high profile examples are Lingam’s video, PKFZ and
National Feedlot Corporation’s “cow” scandal.

Based
on Transparency International’s Corruption Perception Index, Malaysia ranked
moderately in 2012. Out of the 176 countries being ranked, Malaysia is at
number 54th with a score of 49 out of 100 (equivalent to 4.9/10 in
previous scoring system, see Table 3). Despite a moderate ranking, it is still
not acceptable that Malaysia ranked below less developed nations like Botswana
(30th), Bhutan (33rd) and Rwanda (50th) while
achieved only one score point more than Namibia (58th).

Table
3: Corruption Perception Index 2012

Country

Ranking
(score)

Country

Ranking
(score)

Malaysia

54 (49)

Italy

72(42)

Indonesia

118 (32)

Spain

30 (65)

Thailand

88 (77)

Germany

13 (79)

Singapore

5 (87)

Portugal

33 (63)

India

94 (36)

United
Kingdom

17 (74)

China

80 (39)

Greece

94 (36)

Philippines

105 (34)

Brazil

69 (43)

Vietnam

123 (31)

United States

19 (73)

(Source: Transparency International)

Over
the years from 2001 to 2012, Malaysia’s best ever ranking is 33rd recorded
in 2002 (see Table 4). Then, it gradually worsens to rank at 60th (in
year 2011) with fewest score ever at 4.3 points. These is an initial alarm that
corruption in Malaysia has (i) lingers around 5.0 scores with downwards trend,
and (ii) comparative ranking deteriorating from “30th plus” (2001 –
2005) to “40th plus” (2006 – 2008) and then to “50 plus” (2009 –
2012).

Table
4: Malaysia’s Corruption Perception Index (various years)

Year

Score

Rank

Total
countries

2001

5.0

36

91

2002

4.9

33

102

2003

5.2

37

133

2004

5.0

39

146

2005

5.1

39

160

2006

5.0

44

163

2007

5.1

43

179

2008

5.1

47

180

2009

4.5

56

180

2010

4.4

56

178

2011

4.3

60

182

2012

4.9

54

176

(Source:
Transparency International; Score “10” is best)

Corruption
needed to be stopped as early as possible. Malaysia still has ample opportunity
to do so for the sake of future economic development.

Create Super Industry/Brand

Products
with no outstanding advantage or superiority is easy to be replaced thus, has
many substitutes. In economic theory, these products are elastic and usually
less value-added. Most if not all of products produced by developing countries
including Malaysia are like that.

Contrast
to developed countries, they have their own brands that are globally recognized
and hardly replaceable. Thus, their products are inelastic and higher value-added.
Table 5 shows world most valuable brands in 2013 by Forbes. None of them came
from Malaysia. Brand value of Apple is about a third of Malaysia’s GDP in 2012.
Despite lower brand value, Samsung recorded US$ 181 billion brand revenue,
which is more than half of Malaysia’s GDP. If one or few of these top brands
belong to Malaysia, what positive effect will they bring to our social economy?
Thus, we need to create our own super industry or super brand of international
standard.

Table 5: World Most Valuable Brands in
2013

Rank

Forbes

Brand value*
(US$ bil)

Brand revenue*
(US$ bil)

1

Apple

104.3

156.5

2

Microsoft

56.7

77.8

3

Coca-cola

54.9

23.5

4

IBM

50.7

104.5

5

Google

47.3

43.5

6

McDonald’s

39.4

88.3

7

General
Electric

34.2

132.1

8

Intel

30.9

53.3

9

Samsung

29.5

181.0

10

Louis Vuitton

28.4

9.4

(* as at
November 2013)

Conclusion

George Bernard Shaw, an Irish playwright,
socialist, and a co-founder of the London School of Economics once said: “Doing
what needs to be done may not make you happy, but it will make you great.”
Thus, our economic transformation should be need-based prioritized regardless
of how painful or difficult to achieve it. As George saying, we may not be
happy of what we need to do now, but will be great after our need-based transformation
success!